U.S.-China geopolitical tensions and China’s strict policies are triggering a retreat from the communist country by an ever-growing number of U.S. companies. China’s economic slowdown, regulatory environment, forced local partnerships and rising wages are motivating multinational companies to reconsider shuttering and relocating their operations from China.
But this should come as no surprise as geopolitical risk exposure is the No. 1 driver of reshoring. Corporate strategists are reshoring as insurance against that risk. Meanwhile, multinational companies are reconfiguring their supply chain strategies – choosing localization, China +1 or “anywhere but China” policies to reduce risk and their over-reliance on uncertain Chinese policies.
Regulatory risk retreat
In 2022, a Chinese government directive known as “Document 79” expanded a pre-existing policy geared at pushing U.S. technology out of the country. The newly expanded policy requires state-run enterprises to replace all foreign IT software by 2027, beginning with U.S. hardware makers. Companies like Dell and Cisco, therefore, have seen much of their hardware replaced by Chinese competitors’ products as Beijing pushes Chinese buyers to purchase more from domestic suppliers.
Amid the shake-up, IBM decided to completely shutter its decades-old R&D operations in China. Historically, IBM was considered one of China’s biggest telecommunications operators, but higher wages, steadily declining revenues and compliance risks have made operations there risky and less attractive for the tech giant.
Tech behemoth Apple has also been affected. The company has been particularly vulnerable because most of its products are assembled in China – major production delays prompted Apple to begin shifting supply chains out of the country. Additionally, China’s strict Covid measures and power supply problems are estimated to have cost the company $30 billion in the four years since the beginning of the pandemic. As of 2024, Apple’s suppliers, including iPhone manufacturer Foxconn, have invested approximately $16 billion to shift manufacturing out of China.
Additional efforts also led Apple to reshore some of its semiconductor manufacturing to the United States. Its A16 Bionic chip for iPhones is now manufactured at Taiwan Semiconductor Manufacturing Co.’s (TSMC) Fab 21 in Arizona.
To help companies reshore essential goods, U.S. policy incentives have been put in place to reduce U.S. reliance on China. Thanks to CHIPS Act manufacturing incentives, tech companies will be able to reshore more chipmaking to the United States, including dozens of companies that have committed to U.S. semiconductor investments. TSMC’s total investment alone will be more than $65 billion.
Benefits of localization
Other examples of localization include Adidas, the second largest sportswear manufacturer in the world. According to CEO Bjørn Gulden, Adidas is avoiding China in its U.S. product sourcing.
“We have basically tried not to source any products anymore from China into the U.S.,” he said. The company aims to make its supply chain more local to improve speed and agility and to avoid the threat of higher tariffs on products manufactured in China. Thirteen of Adidas’ Tier 1 suppliers are now located in the United States.
In another example, the risk of higher tariffs on goods manufactured in China prompted Helen of Troy, the U.S.-based maker of Hydro Flask, to move some of its production out of China to the Western Hemisphere. The company also expects to nearshore its Oxo Pop container production in 2024 to reduce potential exposure to tariffs. The nearshoring strategy “will help us diversify geopolitical risk, enhance our responsiveness and reduce inventory,” said Noel Geoffroy, the company’s COO.
Finally, Sharpie-maker Newell Brands is reshoring its writing products from China to its Tennessee factory. The company plans to reshore additional production to its existing manufacturing network, especially writing, baby and home products.
“We plan to stay agile and connected as the U.S. economic policy unfolds, so that we can take advantage of opportunities for growth while minimizing potential negative impact,” said Chris Peterson, the company’s CEO. Newell Brands expects to reduce its China sourcing exposure to less than 10 percent by the end of this year.
Continuing challenges
Beyond the myriad of supply chain woes, U.S. companies doing business in China continue to face a range of challenges, including bad-faith trademark registrations, trade secret theft, online piracy and counterfeiting, adverse technology transfer requirements, and rigorous IP ownership and R&D localization requirements. In turn, more money is retreating from China than is being invested for the first time in 40 years. Foreign direct investment (FDI) into China contracted for the first time in more than a decade in 2023, representing an 8 percent plunge year over year.
Today’s geopolitical risk scenarios include:
- Total decoupling: war over Taiwan
- Economic decoupling: tariffs grow so broad and high that China is no longer economically competitive
- Consumer decoupling: consumers increasingly reject Chinese products for alternative sources
To compare alternative sources, companies can use the Reshoring Initiative’s free online Total Cost of Ownership (TCO) Estimator and new Geopolitical Risk measure tools. Geopolitical risk is the probability in one year of a major disruption in trade resulting in the cessation of exports from that country to the United States because of an adverse geopolitical event. Detailed risk values are available. User data shows that 20 or 30 percent of what is now imported from China can be sourced domestically at equal or greater profitability even before factoring in geopolitical risk. The revised TCO Estimator includes a quantification of geopolitical risk.
The Reshoring Initiative’s mission is to get companies to do the math correctly using the TCO Estimator. By using TCO, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors. Are you thinking about reshoring? For help, contact me at 847-867-1144 or harry.moser@reshorenow.org.
